Imagine if some of the key patterns in our lives, the length and nature of the seasons for example, were to change. With mounting climate damage, that may well become the case. In other aspects of human life, such as longevity and the length and form of the working day, long established patterns are already changing – on balance we will live longer active lives, and work continuously, from home.

Another deep-seated change is the business cycle. There are not many people who spend time thinking about the business cycle, given it is a dull corner of economics, but the ebb and flow of the cycle affects us in a fundamental way, through pensions, jobs, investment and wealth.

In recent posts I have mentioned the business cycle a few times, in the sense that the rhythm of the business cycle may soon change, and I want to expand a little on this now.

To put this in context we have, by the benchmark of history, lived through an abnormal period over the past thirty years in that it has been characterised by three of the four longest business cycles in modern history (back to 1870 according to the NBER). Starting in 1990 with the fall of communism and the rise of globalisation, they have stretched for an average of 120 months, twice the long-term average. If we go further back in history, using mostly UK data, business cycles have tended to be even more jumpy.

Indeed, these staccato’d business cycles were driven by factors such as poor harvests (1880), wars (Napoleonic wars) and credit crises (1870’s) – each of which is problematic today. In that context, my hypothesis is that the world economy will rejoin the rhythm of shorter business cycles, for the following reasons.

The first, as regular readers will expect, is that globalization is broken. Many of its component parts such as long-run secular trends in technology, the export of deflation from China and a settled geo-economic climate, to name a few, were drivers of long periods of expansion. Now the boons of globalization – low inflation and rates, geopolitical stability and fluid trade/supply chains – are all being reversed.

A second reason is that the latter part of the period of globalization has produced a series of imbalances. The next ten or so years will be marked by the unwind of these imbalances. Specifically, there are three that I would flag – central bank balance sheets and monetary policy in general, international debt to gdp levels and climate damage. The correction of these imbalances will be one of, if not the defining pre-occupation of policy makers this decade.

Central bank balance sheets are, from next week with the advent of ‘QT’, going to begin a difficult contraction, the result of which will be a sharp negative wealth effect, the return to ‘normal’ of markets in the sense that they provide much better, realistic signals about the state of the world. One side-effect is that credit markets will work better, there may be fewer zombie companies and better allocation of capital, though the likely effect of this on the business cycle will be to have a shortening effect.

In turn, an environment where inflation and interest rates are ‘less low’ debt becomes harder to manage, and in emerging markets there are already mini debt crises brewing. One rather dramatic hypothesis of mine is that in 2024 (the centenary of the 1924 debt crisis) we have a world debt conference that aims to reduce debt levels through a grand programme of restructuring and forgiveness. Such a conference might only be necessitated by a 2008 style crisis – which at the current rate is not beyond policymakers.

That’s a dramatic scenario and a more likely one is that the burden of debt across countries and companies makes a repeat of the long expansion cycles of the recent past a difficult act to follow.

Sticking with debt, a favourite comparison of mine is between the rate at which the climate is warming (percentile ranking of recent world average temperatures) and rising indebtedness. Both are symptoms, not so much of globalisation but rather of unsustainable development – in both cases near existential risks are mounting, and there is a failure of collective action to deal with them. So, just as the world economy recovers from the 2024 debt crisis, it will tip over in the 2028 climate crisis.

Enough doom mongering but I do want to focus on collective action. In the recent past the large developed and emerging economies of the world were synchronised in two ways. First, structurally in that the West provided capital and consumption while the East brought manufacturing. This is now disrupted – in very broad brush terms, the west wants to reshore, while the east is happy to consume the goods it makes, and increasingly to enjoy its own wealth.

Second, policy across the blocs was coordinated, or at least there was a sense of openness and fluidity of policy discussions – the Plaza Accord is an early example, as is the ‘Committee to save the world’ that brough the Asian crisis to a close and then the G20 intervention in 2008 is another. Today, China and the US are barely on speaking terms, and the idea of strategic autonomy means that Europe increasingly needs to look out for itself.

A final complexity for the business cycle is that so many aspects of economics are changing – the nature and structure of work, the troubling trend in low productivity, the economic drawbacks of high wealth inequality and the way in which the notion of strategic autonomy will warp investment trends. This makes for much economic noise, and my sense is that all in it adds up to a world where the business cycle is incessantly disrupted and where businesses and policy makers need to think in terms of four rather than ten year business cycles.

Have a great week ahead,

Mike

Simon Kuper has another, good book out, called ‘Chums’ which explains how Oxford, and specifically its debating society the Oxford Union (as well as some related clubs like the Oxford Conservative Association) have created an eco-system that has funneled its members into a near monopoly of political power in the UK, and most dangerously of all has supplied the protagonists of Brexit.

Part of Kuper’s argument is that the Oxford Union – a very good number of whose presidents (e.g .Johnson, Gove, Hague) have gone on to senior political roles – is a kindergarten for Westminster politics.

I picked up a copy of the book on Thursday.

What made this purchase interesting was that I bought the book in Oxford, on my way to speak at the Union, but more about that later.

An interesting and important theme that emerges is the labour market for politicians and the impact of this on decision making. When you see the manner in which the Oxford Union debating chamber resembles the set up at Westminster and indeed the way in which the Union building, like Westminster, offers bars, libraries and meeting rooms that could foster conspiratorial behaviour, it is no surprise that budding politicians are drawn to it as a forming ground, and in turn that the networks made there have such an impact at Westminster.

In other countries, aspiring leaders follow channels also – notably Harvard, Georgetown and Yale Law in the US, and ENA (École Nationale d’Administration) in France. In many other countries – the US, Asia, Greece, Ireland and Spain for instance, families form the training ground for young politicians and seats are often passed through generations (a much less egalitarian approach).

The outsized role that the Union plays in British politics betrays the fact that unlike other important professions such as the military, the Church and medicine there is no training for politicians – at least in the UK. France as mentioned has ENA which turns out well formed technocrats, and in the US the fluidity with which people can pass from professions (law, Wall St, public service, the army) into politics means that elected representatives come to politics with a good degree of experience.

The tendency then is for the stereotyped Oxford educated politician to favour form (wit, speaking ability) over attention to detail, an approach that was evident through and beyond Brexit (though Olly Robbins the UK’s original negotiator was also an Oxford graduate).

One solution then would be a British ENA, and notably in the 1990’s I recall a group of left leaning Oxford academics (Roger Undy the labour economist for example) organizing courses in change management for the members of the future Blair cabinet, and to an extent the Blatvinik School at Oxford does this now.

The idea of a school for politicians, at lease in England, seems fanciful because the ethic of British politics is that policy is best left to civil servants and parliament is for entertainment. The flaw in this argument is that the civil service – from the Treasury to the Foreign Office – has been increasingly run down, denuded and bullied by politicians (Priti Patel and lately Jacob Rees Mogg). This produces a policy, ideas and implementation wasteland.

The majority of university graduates who might have been attracted to the Treasury or Foreign Office see this, and instead opt to work in industry and this, rather than the lying and braying of the current Tory elite, is the real emerging structural flaw in the British system.

Back to the Union. When I was a student at Oxford the Union was not quite my scene, though I remember seeing some memorable speakers there, like Lech Walesa and Imran Khan.

This time, I was surprised at how young the students looked (its really that I am much older), and expect that they are a much more diverse, balanced and sensible group than the Union Committees of the 1980’s, but probably less entertaining at the same time.

I enjoyed my evening at the Union, though disappointingly for someone who cares about the risks of ‘the end of globalisation’, our argument (Colin Yeo, Paul Donovan and myself) that ‘this House would abolish borders’ was rejected by the Union membership.

As a cheeky end to my story of the Union, if you want an alternative, ribald view on what life at an Oxbridge college should be modelled on, then have a look at the tv series based on Tom Sharpe’s excellent ‘Porterhouse Blue’.  

Have a great week ahead,

Mike

Last week I did a talk entitled ‘2030’ – a topical title these days given the cloudy outlook and there are already some decent books such as Jim Stavridis’ ‘2034’ that look out that far. Yet, the fallacy of forecasting is to try to imagine discrete events in the future – a better starting point in looking ahead eight years is to go back eight.

If we travel back to 2014, the key events were Russia invading Crimea, Britain’s existential political struggle (Scottish independence), an epidemic (Ebola in Africa), pro-democracy protests in Hong Kong, an economic crisis in Europe, the election of Modi in India and Iranian nuclear talks. Many of these phenomena are still with us (Modi, Iran), others ‘we’ failed to take seriously as portending more serious developments (Russia, Brexit, Epidemic, HK). In particular, the last four have stress tested globalization and found it wanting each time.

If, based on the comparison of 2014 to today, we extrapolate a trend in the behaviour of nations then we might hazard that by 2030 Russia and China will form a lonely anti-Western alliance, Emmanuel Macron will be President of the EU, Hungary will be been forced out of the EU replaced by Scotland, several international conflicts have been caused by food and water shortages, despite massive advances in healthcare technologies.

Alternatively, a contrarian or controversialist view might see Russia applying to join the EU, the UK becoming the Singapore of Europe, Japan quickly building a nuclear weapons program and a metaverse driven mental health epidemic.

That demand for ‘2030’ vision is high, is attributable to the end of globalization and the opening up of uncertainty over issues like geopolitics and more recently monetary policy and financial markets.

As we stressed in last week’s note, I believe we are now into a phase called ‘The Interregnum’, one where the old order is being broken down and slowly new structures will be built up. My endpoint is a multipolar world of large regions who ‘do things’ differently. How well formed this will be by 2030 is hard to tell.

There are a few tectonic shifts that I would like to highlight, the first of which relates to geography.

Going back to Paul Krugman’s early work on geography and trade, the great triumph of globalization is that it undercut geography in the sense that industrial production and even less so trade, were tied to geography. Tom Friedman’s ‘The Earth is Flat’ was a schmaltzy celebration of this.

In the next eight years and beyond, geography will again be undercut by the notion of ‘values’ or ways of doing things. The European Union is driven by a values based approach to its community (much of which is lost on its 500 million citizens), based around social democracy. As an example, Hungary is an EU member but its leadership and electorate increasingly express a very different set of values, which is why I consider it may not be an EU member by 2020. In contrast, the British value system is consistent with that of the EU, which is why Scotland would relatively easily be a member and England can continue to cooperate closely with the EU on international affairs.

A values based approach to politics and diplomacy is quite different to the idea of alliances that have historically bound nations because values are deeply rooted in the culture of regions and the behaviour of their citizens. In that respect however, Europe is the least interesting of the regions.

In the USA, whether people realize it or not, there is a grand contest ongoing over values, the latest battle ground of which is Roe v. Wade, and across Asia countries like the Philippines and Thailand on one side and Japan and Taiwan will interrogate their value systems relative to the role of China in Asia, the stresses on both autocratic and democratic models of governance and socio-economic topics like immigration.

One of the most pertinent indicators of ‘value’ based approaches is the treatment of women and the LGBT communities. There is a very strong correlation between these factors and other important markers such as the quality of democracy, innovation, quality of life and human development variables. Small advanced economies are a great example.

In economics, I have already speculated that the very long business cycles of the past thirty years will likely be replaced by shorter boom-bust cycles, not least because there will be less synchronicity between the large economic regions.

Another major, likely change with 2030 in view will be the transition of corporate business models from the ‘globalised’ one (where different functions could be dispersed around the world) to one where there is more of a focus on the vertical industry chain – a process that is dominated by two factors, a community of users or clients (think of fintech or health tech) and a skeleton of very efficient technology that links them with services.

I want to finish this week’s note by returning to 2014, and offer a final thought to scare you on a Sunday morning. Many of the crises of our day were prefigured in 2014. The one recurring danger that is manifest across the world is climate damage – parts of east Africa have not seen rain in two years, India is experiencing brutal heat. In this respect I think the extent of climate damage and the policy reaction to it will be the swing factor that determines what 2030 looks like. 

Have a great week ahead,

Mike

One of the curious accoutrements of the Kremlin are the very large benches that sit just outside it, almost too big for comfort such that the first time I passed them I imagined giant Cossacks resting themselves as they visited the capital. What those giant Cossacks might make of today’s Russian army would be interesting to know, especially with Monday’s ‘Victory Day’ military display in and around the Kremlin.

It is expected that the Russian President will use the occasion to formally declare war on Ukraine and call up a full mobilisation of troops (especially conscripts). Such a move will deepen the conflict around the invasion of Ukraine, may result in the use of heavier and more deadly armaments and further entangle Ukraine in a proxy war.

Of course, another avenue open to Vladimir Putin may be to use Victory Day to engage in some much needed risk management, and to declare a ‘mission accomplished’ in the context of a much degraded Russian army. If he did so, it would be in keeping with the current macro climate where in the context of the unravelling of monetary policy and the business cycle, ‘strategy’ has given way to risk control.

While Vladimir Putin and the Nasdaq don’t ordinarily have much in common, this week’s pronounced volatility in the financial markets (an assortment of some of the biggest daily moves in over 50 years), and Mr Putin’s behaviour, together signal that we are at the end of an era – that was marked in particular by peace and by the benevolence of central banks.

In many ways as we leave globalization behind, we are unwinding its many positives, and those who puzzle the fact that there are so many ‘events’ should step back and consider the very big picture which is that economic, geopolitical and financial cycles have left the ‘globalization phase’ and entered what I have called ‘the Interregnum’.

The Interregnum is not a well defined phase, but rather involves the breaking down of established things (from political parties in France, to the WTO, and more recently apparently  Roe/Wade to give a few examples) whilst more optimistically building up ‘new things’ (the digital economy, better healthcare, a more robust EU).

My suspicion is that from an economics point of view, one of the key factors that will define the ‘Interregnum’ with respect to ‘globalization’ is that we will have much shorter business cycles, certainly compared to the two very long ones that characterised globalization (i.e. ‘92-‘01, ’11-’20) as the effects of QE, indebtedness, questionable productivity rates and digitisation all unfold. This will necessarily make financial markets more interesting.

If this is the case it will make life more difficult for companies at large, for real estate in particular and at a guess may mean that more capital flows to companies operating in areas defined by new technologies and innovations (healthcare in particular) and that are part of secular trends (the ‘building up’ part of the Interregnum). Here it is important to state that companies that rely on leverage and that masquerade as innovators, will find life difficult.

Another emerging challenge, if we are to enter a period of shorter business cycles, is how to organise institutions, companies and the process of innovation. Digitization and the growth of the venture capital industry means that new enterprises can start and grow very quickly (TikTok is the example many think of). Adaptability will be another criteria and here there is a growing focus on how the Ukrainian army has organised itself in a much more flexible way compared to the Russian one, and how this particular case study reinforces the idea of decentralised, dynamic organisational models.

This neatly brings me back to Mr Putin, and makes the point that in the 21^st century institutional quality, freedom of thinking and human development will continue to be important determinants of country success. He has neglected all three.

As such, I would like Mr Putin to act as the risk manager rather than grand strategist or evil dictator on Monday, but I worry that the risk of a tail military event (isolated strike into Poland or against a Scandinavian/Baltic state) is still too high.

Have a great week ahead

Mike